Archives For HMRC

Those of you with long memories (or chronic insomnia) may remember a blog I wrote in 2011 on the topic of HMRC’s approach to discovery assessments. To recap, the worry was that HMRC were using discovery as a backstop to try to cover up their own administrative failings, trying to claim that some technical deficiency in the taxpayer’s documentation entitled them to the longer time limits of what is meant to be a reserve power used only in rare cases.

Well, this week I read another case report, and they’re still at it. Like one of the earlier cases, the taxpayer had been using a reportable “DOTAS” arrangement, and the question was whether they had properly alerted HMRC to the structure so that HMRC could challenge it inside the usual 12 month window. What sets this latest case apart and makes it particularly relevant is that the debate only arose because of an issue in the taxpayer’s software package.

The details of the case turn on fine technical points of law, but the fundamental issue was whether the taxpayer had deliberately caused a loss of tax. For this to be the case, they needed to have consciously entered the relevant entries where they did in the return. In fact they had only put the entries where they did because a shortcoming in the software prevented the “correct” disclosure – all the right numbers were there to create the intended result, and there was clear notification in the “white space” of what had happened and why.

Neither the taxpayer nor his advisers appreciated that strictly the boxes they had used created a subtly different legal groundwork for the desired liability, with an immediate and inevitable loss of tax, rather than the creation of a freestanding credit which as a matter of choice had been set against the relevant income.

The practical upshot was that because the taxpayer had not deliberately created a loss of tax, HMRC could not apply the 20 year limit for claims that they would have needed to rely upon by the time they got around to trying to sort things out properly. Now, none of this goes to the rights and wrongs of the underlying scheme – but what it does illustrate is that the tax law and the software that purports to implement it are inextricably linked.

How *does* the law deal with situations where the software doesn’t quite align to the legal requirements? On the basis of this case, the answer to that would appear to be “slowly and painfully”. If it were only the users of esoteric avoidance schemes finding that the software can’t quite reflect the reality of their tax affairs in strict accordance with the minutiae of the 19,000 pages of UK tax law then it may not be such an issue.

But HMRC’s brave new world of Making Tax Digital beckons, and in this new legislative wonderland of interim reports, revised record keeping requirements and The Death Of The Tax Return, the Tribunals, taxpayers and HMRC alike will be finding out for the first time just how well the software developers have been able to predict what the final shape of the clauses passed in Finance Act 2017 will turn out to have been.

The new software packages haven’t been written yet – but then again neither have the rules that they’re supposed to implement. As Raymond Tooth and the Commissioners for Her Majesty’s Revenue and Customs, 2016 UKFTT 723 TC05452 illustrates, the ability (or otherwise) of the software to accurately reflect precisely the requirements of the Taxes Acts can be fundamental to whether a tax liability even exists – and that’s too important an issue to rush. There’s a line to be drawn between agile development and clairvoyance; developing the process and software for MTD before we know what the legal basis is for it runs the risk of falling the wrong side of that line.

Like this:

Reading news report about tax avoidance, one might be forgiven for thinking that tax practitioners, unhappily repeating the mantra that tax avoidance is not illegal, are opposed to the government and HMRC’s efforts to fight tax avoidance.

But the truth is most tax practitioners – and certainly ACCA – fundamentally agree with the lawmakers that aggressive tax avoidance needs to be tackled. Yes, we believe that all individuals and businesses have a responsibility to pay their fair share of tax. And yes, tax practitioners have a responsibility to act in the wider public interest: this includes working hand-in-hand with tax authorities to counter unethical tax behaviour.

Indeed, tax practitioners are some of HMRC’s most important allies in tackling tax avoidance. They advise clients on tax planning opportunities, and as such, are the first line of defence in warning clients against aggressive tax avoidance. Without tax practitioners disclosing information to HMRC, many tax avoidance structures would not have come to light.

However, it was with trepidation that we received HMRC’s consultation document, ‘Strengthening Tax Avoidance Sanctions and Deterrents’. Our concerns extend beyond the realm of tax, to wider issues of public interest. So to ensure a full response we collaborated across the tax and regulatory teams and with our Global Forums for Taxations and Ethics.

The proposed measures cast a wider net over all those ‘design’, ‘market’, facilitate’, and ‘promote’ tax avoidance arrangements, by levying penalties on each agent, adviser and intermediary involved whenever an arrangement is ‘defeated’. Besides punishing those who enable tax avoidance, the consultation document also proposed corresponding penalties on the taxpayers who use such defeated tax avoidance arrangements. Our three main concerns are:

For an arrangement to be defeated, a penalty does not need to be charged on the taxpayer. This means that HMRC could deem an arrangement to be ‘defeated’ simply by reaching ‘an agreement with the taxpayer […] that the arrangements do not work’, without a case going through Tribunal. Given the line between legitimate tax planning and aggressive tax avoidance is still blurred, this reliance on moving goal-posts could put off tax practitioners from providing ordinary tax planning advice;

The proposed trigger for penalties, without considering the taxpayers’ or tax practitioners’ motives, means that penalties are likely to be both disproportionately high, and disproportionately expensive for HMRC to administer;

HMRC seems to favour an approach where tax practitioners, other intermediaries and taxpayers are guilty until proven innocent. Their intention, it seems, is to get everyone into the net from the start, and then put the onus on each accused party to appeal against penalties. Granted, ‘fairness’ in tax is a difficult and divisive concept, but such a move does appear to us to be fundamentally unfair.

The bottom line is this: regulatory burden can become so great that compliance becomes impossible given the resources available. The proposed measures follow a whole raft of recent measures in the UK: General Tax Avoidance Rules, Disclosure of Tax Avoidance Schemes, and Promoters of Tax Avoidance Schemes. The existing rules oblige tax practitioners to tell HMRC about tax avoidance schemes; the new rules threaten to punish the same tax practitioners for the tax avoidance schemes that they tell the HMRC about. Some practitioners, particularly in small and medium practices, may be driven out of the tax advisory business by the cumulative and often contradictory effects of recent regulation. At the same time, unethical and aggressive tax avoidance behaviour will continue underground which no one wants to see.

Our one message to HMRC is: work with us, not against us. In order to fight tax avoidance effectively in the long-term, HMRC needs to build a relationship of trust with tax practitioners. The way forward is to work with the profession to strengthen and improve ethical standards, not by adding another layer of regulation.

Like this:

If the only tool you have is a hammer then every problem looks like a nail. If you spend your whole time focused on just one topic, you can sometimes lose sight of the importance of other areas. Some topics though are too important to ever ignore completely, and when it comes to the relationship between business and society, one of those areas is tax. Every business should pay its correct share of taxes, in full and on time, both as a matter of law and as a point of principle.

But HMRC staff, who spend their whole lives engaged in just the one field, must remember that there is more to the world than tax returns.

One of the first things I was taught as a young tax trainee in practice was never to let the tax tail wag the commercial dog. It’s a sentiment HMRC subscribe to as well, especially when trying to ascribe motive in what may be an avoidance scheme. But what we’re at risk of seeing in MTD is the administrative tail not so much wagging the commercial and social dog as dragging it, unwilling, into a morass of unwanted and unfamiliar process changes.

HMRC’s own research indicates that 400,000 businesses would rather disengage totally from reporting their taxes than transmit their information over the internet to a government body. For those prepared to give it a try, the outlook is “challenging”.

The rollout programme currently envisaged by HMRC would see a huge spike in conversion to the new processes between April 2018 and April 2019, with taxpayers having to make the changeover at a rate of more than 1 every 9 seconds, day and night, week in, week out, with no break for Christmas, Easter or HMRC’s “software upgrades”.

Around 40% of them will need assistance with the new systems – or to put that in real numbers, about 1.5m. With a staff not much more than 50,000, that leaves every HMRC staff member an allocation of around 30 taxpayers to hand-hold through the process – or pass the burden onto friends, family, neighbours and Citizens Advice. Of course, helpful acquaintances may not know enough about the system (either the tax or the technology side) to really help out – while charities with experience in the sector have warned of the risk of exploitation of vulnerable taxpayers if they have to rely on third parties to handle this aspect of their financial affairs.

HMRC’s MTD proposals for big business would allow for a longer, later conversion period and provide a less pressured environment for the HMRC staff. It may be sensible to do the first tests with some volunteer big businesses, for even their (more complicated) systems are likely to suffer significant disruption. But some businesses would relish that opportunity. If they and HMRC could work together to understand how this might all be made feasible, then it’d pay dividends for everyone. In any event, some of the issues facing taxpayers (poor broadband, unfamiliarity with the internet) will heal themselves while a robust and workable system is developed for wider rollout.

The digitally disenfranchised are a poor target market for merging two of the things that many people find hardest to understand – tax and modern technology. The additional delays introduced by the Referendum vote, not to mention the related uncertainty about the future of VAT, give weight to our calls to rethink at least the timetable – and with it the chance to maybe revise the substance.

Tax systems exist for the benefit of society, not the other way around. At a time when there are concerns about the whole of the rest of what society gets up to, breaking the bit that pays for it all is the last thing we need.

Manos Schizas, ACCA Senior Economic Analyst, said: “Unlike previous Budgets and Autumn Statements, or PBRs, this Statement is aimed squarely at high-street businesses with plans for slow, steady or no growth. There is an irony in how talk of ‘rebalancing’ the UK economy has disappeared now. Growth is now once again meant to be fuelled by consumption, retail spending, and housing rather than by investment.”

Sarah Hathaway, head of ACCA UK, said: “Businesses, now more than ever, are looking for long-term, sustainable measures that extend beyond the term of Parliament or government. Quick fix, sugar-coated initiatives are not what the City and the wider UK business community are looking for and create uncertainty at a time when UK plc is looking to build on firmer ground. While many announcements in the Autumn Statement are favourable to businesses, their life span and breadth of impact will be critical for the economy. This sentiment is true for other government policies, for example apprenticeship funding, so that businesses have the foundations of both finance and skills in place to grow.

“The Bank of England has shown its understanding of businesses needs for certainty, first through its introduction of forward guidance and, just last week, its decision to make the Funding for Lending Scheme a business initiative rather than the home loan vehicle it had become. Businesses need that level of certainty about the long-term from the Treasury as well as from Threadneedle Street.”

Small and Medium Sized Business

Rosana Mirkovic, ACCA Head of SME Policy, said: “The Government has moved away from the previous focus of encouraging growth in the more dynamic SMEs towards supporting smaller enterprises through business rate inflation caps and a further promise of reforms on this front in 2017. Various measures announced for supporting the bricks-and-mortar high-street businesses show a welcome move back to supporting the smallest and micro businesses. However, braver decisions could have been made – business rates reform has been put off for 2017, when it is clear from previous, recent budgets that the system was just not designed to take spikes in inflation into account.

“Reducing National Insurance contributions for young people could help small businesses, however, whether this is aimed at helping SMEs or get young people off benefits is an important distinction. SMEs in the UK are calling for a more skilled workforce, not an unskilled one.”

Taxation and State Retirement Age

Chas Roy-Chowdhury, ACCA’s Head of Taxation, said: “Families across Britain will need to look in detail at what the Autumn Statement means for them. The married persons tax allowance is a welcome move in principle, but not everyone benefits. In having an allowance restricted to those who are basic rate taxpayers creates an even more complex tax regime as well as confusion around couples who eventually become higher rate taxpayers. It should be possible for all taxpayers living with a partner to benefit from the allowance.

“There is logic in the government increasing the state retirement age to 68 by the mid-2030s, as people live longer, but at the same time families looking to save for retirement are being penalised. The annual pension contribution limit is set to drop from £50K to £40K and the total value of the pot people can have will also drop by quarter of a million pounds from next April, so those trying to be frugal and not be dependent on the state are being squeezed.

“ACCA welcomes the decision to exempt HMRC from further budget cuts. It is vital that it is properly resourced to keep the tax system running, and help give staff the promised crackdown on those who try to evade or exploit that system. However, ‘no further cuts’ actually means cuts in real terms, making life difficult for HMRC. The Government wants to tighten tax collection, but it needs to invest in HMRC to achieve it.”

The bigger picture needs to be looked at when it comes to how corporations are taxed in the UK. There are other and additional ways by which companies in the UK are taxed, for example through VAT and through National Insurance Contributions (NICs).

A publication produced by the Office of National Statistics back in March, shows VAT numbers have held up remarkably well since the economic downturn because, the VAT rate has gone up to 20 per cent. That is probably what we need to look at in terms of the basket of taxes that we have moved towards—those companies that we know are going to be tied into the UK rather than those that can look at different locations to do business that are more favourable for them, taking tax as one of the factors and one of the components that they look at.

The fundamental problem is that large companies are by nature multinational – their shareholders, activities and customers are spread across the world – whilst national governments are not.

There is a tax chasm between what governments seek to capture by way of corporation tax and what companies, many of which are global in terms of their shareholders, activities and customers, generate in terms of global profits.

In practice, existing rules are highly complex and differences between countries can be exploited well within the law. HMRC has adapted to this and is not sitting on its laurels as some other Parliamentary committees have suggested. They are quick and effective and have developed a greater understanding of how companies work. The majority of corporations go through the tax process with ease. HMRC has achieved this despite declining resources.

ACCA wants to see tax simplicity. But that’s a big ask.Adam Smith’s four principles of what makes a good tax system – proportionality, transparency, convenience, and efficiency – still stand centuries later. I don’t think we’re near this and I also think we are in danger of losing trust in the tax system.

The House of Lords Economic Affairs Committee also raised the issue of naming and shaming those who have promoted aggressive tax avoidance or tax evasion schemes.

ACCA believes if naming and shaming is going to be introduced for tax avoidance, which is legal, the bar needs to be set very high. The complexity of the tax system means there is a risk that mis-interpretation could result in naming and shaming of a tax adviser; this could result in severe reputational damage.

We have long been calling for greater regulation of tax advice. While ACCA and other accountancy bodies have strict regulation and standards, anyone can set up and offer tax advice without those safeguards in place.

There’s no denying that all this is a very tricky and complex situation. But it is heartening to see that the issue is being discussed at international level, from the EU, to the US; and of course the G8 will be looking at the avoidance/evasion debate in June when it meets in Ireland.